Choice of term. You choose how much to invest and for how long. Terms typically can run from as short as a month to as long as five years.
Guaranteed rate. When you buy the CD, you know (assuming you keep it the full term), exactly what the payout will be.
Insured.
CDs can be insured beyond
$100,000. While institutions
typically insure deposits
for up to $100,000,
the Certificate of Deposit
Account Registry Service,
or CDARS, allows you
to insure up to $25
million, says Keith
Leggett, senior economist
for the American Bankers
Association.
Not as liquid. While you can cash out before your term is up, you could be risking some or all of your interest, says Douglas Borkowski, director of the Financial Counseling Clinic at Iowa State University.
Need
to shop rates.
The rule of thumb is
the longer the term,
the higher the interest.
The problem is that
not all CDs follow that
rule. "In some cases,
short-term is paying
about the same as long-term,"
says Keith Leggett,
senior economist for
the American Bankers
Association. His advice:
Don't lock up your money
for longer periods of
time if you can get
the same rate in a shorter
term.
Low
rates. You could
find better returns
elsewhere. Depending
on your luck, a money
market mutual fund could
give you a better return.
And some savings accounts
(particularly those
offered through online
divisions of some national
banks) are offering
return rates that rival
CDs.
Higher
minimums. CDs
often require higher
minimum deposits. To
purchase a CD, you often
need at least $500 to
$1,000.
CDs
are better for savers who
don't have to have immediate
access to their money or
have it earmarked for an
event that has a specific
date attached, such as a
wedding, tuition payment
deadline, imminent retirement,
or even a holiday or vacation.
Reason: You know going in
that, until a certain date,
you're probably not going
to need that money. In return,
the bank gives you a better
rate.
One
smart CD saver trick: Laddering.
If you want to invest money
in CDs, stagger the time
periods you deposit the
money for, so that you've
always got one maturing.
If you want to buy them
all at once, simply buy
CDs that mature at different
times. That way, you've
made it slightly easier
to access your money if
you find a better deal or
just need the cash.
Like money market mutual funds, CDs can also be placed into tax-deferred accounts for education and retirement. Investors also use CDs as a parking place for money before or after investment.
Relatively
new are indexed CDs, which
offer a rate of return based
on the performance of a
specific index fund. "It's
for someone who is interested
in return, but in general
the money is tied up for
a longer period," says
Keith Leggett, senior economist
for the American Bankers
Association. And unlike
the actual stock market,
the principal is federally
insured and guaranteed.
Trying
to figure out which options
best match your savings
strategy? Here are several
key points to compare and
contrast at a glance.
